Are Japanese Stocks Cheap?

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Marketman
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Are Japanese Stocks Cheap?

Post by Marketman » Sun Feb 04, 2018 2:46 pm

Hello all I am new here, but not new to investing (especially at Vanguard). I thought I would direct your attention to an interesting article that appeared in the Wall Street Journal on February 2, 2018 entitled "Japanese Stocks are Looking Inexpensive." The article points out that nine of the 10 prominent stock markets around the world (including emerging markets) are above their average P/E's for the last 15 years (using forward earnings estimates). The lone outlier is Japan. The Topix average P/E has been about 15 and it is currently a tad less than 14 (even after a big run up last year). The article goes on to say that the author believes the economic prospects are good in Japan.

Any thoughts? I looked into Japanese index funds and they were surprisingly expensive. They all have expense ratios of around 50 basis points. Another fly in the ointment (at the expense of being called a market timer) might be that the dollar has weakened lately. (You buy less foreign assets with a weak dollar.) Any thoughts?

david1082b
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Re: Are Japanese Stocks Cheap?

Post by david1082b » Sun Feb 04, 2018 4:52 pm

I couldn't find a WSJ with that exact title but I searched around and found some WSJ articles that fit this:
The stars have aligned for Japan’s stock market. And things look set to stay that way.
sneaky archive.is snapshot: http://archive.is/Sgc3a https://www.wsj.com/articles/the-one-ma ... 1516079630
Finding a bargain in surging global stock markets isn’t easy. An exception just might be in Asia.
http://archive.is/7mqln https://blogs.wsj.com/moneybeat/2018/02 ... e-outlier/

Predicting the future is one of the hardest things to predict. Individual nations are always being singled out as outliers worthy of extra attention. It seems like noise more than anything. As EM investors found from 2010 to 2015, earnings can keep going down for many years. Russia and Greece were continually promoted as "cheap" for example.

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Re: Are Japanese Stocks Cheap?

Post by david1082b » Sun Feb 04, 2018 4:55 pm

This February 2014 article in the Telegraph had Russia being the cheapest in the world for example: http://www.telegraph.co.uk/finance/pers ... cheap.html

That one didn't work out too well in terms of "buy low", since Russia kept going lower.

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Pajamas
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Re: Are Japanese Stocks Cheap?

Post by Pajamas » Sun Feb 04, 2018 5:06 pm

The Japanese stock market peaked in 1990 and has made lower highs and lower lows since.

It recently broke out and reached a new post-1990 high but has not reached the 1990 peak.

You can see a long-term chart here:

https://tradingeconomics.com/japan/stock-market

One thing to consider is that Japan's population has been roughly flat or even declining as well as aging during the same period and that trend is not changing. The GDP there has also been essentially flat with only very slight growth over the same period. There are other factors that determine the stock market's value but those are difficult factors to overcome.

So even if it is cheap, it is cheap for good reasons.

jminv
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Re: Are Japanese Stocks Cheap?

Post by jminv » Sun Feb 04, 2018 9:57 pm

The japanese stock market is cheap for a reason. Many 'smart' investors tried to take the Japanese anamoly over the years and run with it. The fact is they still have many zombie companies, a crazy work culture that's inhumane and unproductive despite 16+ hour days, terrible consumer confidence, and an aging and declining population. In the face of the aging and declining population they refuse to countenance immigration.

There are routinely stories in the press about salarymen (and women) working themselves to death for their companies. The thing is, though, the work the Japanese do when they're forced by social pressure to stay at the office endless hours is pointless. It's not productive at all. This is backed up by productivity surveys. They stay at the office because other people stay at the office and they're expected to stay as long as the others do. Their meetings are not direct and the decision making process is unclear. There is a culture of hiding widespread problems (defective airbags, steel, etc). Activist investors are still not welcomed. Avoid Japan.

AlohaJoe
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Re: Are Japanese Stocks Cheap?

Post by AlohaJoe » Sun Feb 04, 2018 10:04 pm

Japan's CAPE10 is 28.9. That's the fourth highest in the world right now. (Only Ireland, Denmark, and the US are higher.)

(Remember that people constantly write that when CAPE10 in the US is above 16, then future returns will be low.)

Does that make it cheap or expensive?

How can the US be expensive but Japan be cheap when their CAPE numbers are basically identical?

If Japan isn't cheap...then are we saying that after 30+ years of terrible stock market performance and multiple crashes it is still over-priced?

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arcticpineapplecorp.
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Re: Are Japanese Stocks Cheap?

Post by arcticpineapplecorp. » Sun Feb 04, 2018 10:11 pm

Vanguard's Japan Stock Index Fund shows the P/E is 16.0X and the price to book is 1.4X:
https://americas.vanguard.com/instituti ... ##overview

The Vanguard Pacific Stock Index Fund has a P/E of 14.9X and price to book 1.5X (includes Japan, Australia, Hong Kong, Korea, Singapore and New Zealand):
https://personal.vanguard.com/us/funds/ ... true#tab=2

Wheras the total U.S. stock market index fund P/E is 22.9X and price to book is 3.0X:
https://personal.vanguard.com/us/funds/ ... true#tab=2

and the Total International Stock Market Index fund P/E is 15.9X and price to book is 1.7X:
https://personal.vanguard.com/us/funds/ ... true#tab=2

P/E is not predictive fyi.
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Theoretical
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Re: Are Japanese Stocks Cheap?

Post by Theoretical » Sun Feb 04, 2018 10:40 pm

Japan is fine, but avoid the megacaps for the aforementioned zombiecorp problems. All of the strength for a US investor is in their small to midcaps, especially value.

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whodidntante
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Re: Are Japanese Stocks Cheap?

Post by whodidntante » Sun Feb 04, 2018 11:03 pm

If you look at foreign developed value funds that do not reintroduce price, they tend to overweight Japan compared to float weighting. I don't know about the Japanese market as a whole, but there are some decent value stocks to be had there.

david1082b
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Re: Are Japanese Stocks Cheap?

Post by david1082b » Sun Feb 04, 2018 11:09 pm

Japapnese stocks are definitely cheap-er as of right now 8-)

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Re: Are Japanese Stocks Cheap?

Post by boglerdude » Sun Feb 04, 2018 11:26 pm

To keep inflation up (to keep investors happy?) the BOJ prints money and throws it at every business. They dont go bankrupt...employees are not forced to go find productive uses of time. Same could happen in the US...when asset prices fall, voters get angry.

OTOH quality of life in Japan seems great

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Re: Are Japanese Stocks Cheap?

Post by Hyoga » Sun Feb 04, 2018 11:46 pm

Some japan stocks are cheap. Not all. I had a very decent return in the past year investing in a wide basket of quickly picked stocks, but it's probably just luck. And yes they're definitely cheaper today than Friday.
In the small and mid, you can buy stock at PER below 10 and PB ratio below 1 easily. Now, there are many other factors to consider. And I'm not sure about the market as a whole.
One characteristc that I found was quite general, is that the payout ratio is low. comanies are quite conservative in that regard, and they are loaded with cash that they could distribute but will not without careful ocnsideration. I found that compared to western markets, in proportion more companies pay a dividend, though.

I think Japan may not be that bad in the future. Yes, work culture is awful, population is ageing and decreasing and government not bringing immigration in to cover for that, etc. I think they will get the fruits from that actually. The ageing population will happen in other countries later. Japan is now developping things to adapt themselves, like extreme robotization. Socially it is very stable. With the right combination, they could advance a lot in things not yet needed in other countries, and get ready to sell that stuff in the future. They are also developping tourism like crazy, tripling visitors in the past three years or so. There are some good points. If I take a look at this list it doesn't look that bad either right now.
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inbox788
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Re: Are Japanese Stocks Cheap?

Post by inbox788 » Mon Feb 05, 2018 12:11 am

I know nothing about the Japanese market, but my impression is that they've been cheap for a decade or longer. Don't see why or whether they'll stay cheap for another decade or longer. I do wonder where Softbank is getting all this money and strength in their stock to make all these deals and big purchases (Sprint, Uber, etc.). Toyota seems to be doing well as a company, but don't know how this translates to the stock. On the other hand Sony and Toshiba don't seem to be doing as well. One number that has me concerned about the US market has been our debt and piling on more debt to pay for stimulus packages (tax reform, infrastructure spending, more tax reform, etc.). The US is nearing 100% debt/GDP and growing, but when I see other nations, Japan is over 200%! So I worry we're using the Japan model and it's misguided. I don't know if the number or ratio has anything to do with how Japan's economy is doing or if they will come to a Greece moment. Based on this list, Greece is the only other higher ratio net government debt. Or should we be looking at the net public debt where Japan is even higher than Greece?

https://en.wikipedia.org/wiki/List_of_c ... ublic_debt

https://economics.stackexchange.com/que ... ustainable

http://bond-bubble.com/indexc34c.html?o ... &Itemid=13

Anyway, the saving grace is that if there is a bond crash, perhaps Japan will provide an early warning and US will suffer relatively less.

WanderingDoc
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Re: Are Japanese Stocks Cheap?

Post by WanderingDoc » Mon Feb 05, 2018 3:35 am

boglerdude wrote:
Sun Feb 04, 2018 11:26 pm
To keep inflation up (to keep investors happy?) the BOJ prints money and throws it at every business. They dont go bankrupt...employees are not forced to go find productive uses of time. Same could happen in the US...when asset prices fall, voters get angry.

OTOH quality of life in Japan seems great
Not to mention, the most cultured and polite group of people I've ever encountered (and I don't say that lightly).
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in_reality
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Re: Are Japanese Stocks Cheap?

Post by in_reality » Mon Feb 05, 2018 3:56 am

Marketman wrote:
Sun Feb 04, 2018 2:46 pm
Any thoughts? I looked into Japanese index funds and they were surprisingly expensive. They all have expense ratios of around 50 basis points. Another fly in the ointment (at the expense of being called a market timer) might be that the dollar has weakened lately. (You buy less foreign assets with a weak dollar.) Any thoughts?
FNDC (Schwab Fundamental International Small Company Index ETF) is 38% Japan. It's basically a value type fund (though the methodology includes growth companies that are relatively cheap per their economic fundamentals).

Some don't like the over-allocation to Japan, some don't like the ER 0.39%, and some don't like the methodology but I do because it's less of a sector tilt than traditional value funds. It's been a good performer.

Sep 2013 - Jan 2018 CAGR (life of FNDC)
FNDC 9.66%
VSS 7.62% (Vanguard international small)
VXUS 6.41% (Vanguard total market)

No guarantees going forward of course. Perhaps it wasn't even Japanese equities that provided these returns but a higher allocation to a different country in the past. Ha!

Anyway, I'd prefer a developed international value fund to a country fund.

FNDF which is the large and mid-cap version of the fund is only 23% Japan.

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Pajamas
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Re: Are Japanese Stocks Cheap?

Post by Pajamas » Mon Feb 05, 2018 8:12 am

The short-term central bank interest rate in Japan is currently negative 0.01% and the 10 year rate is 0%.

https://www.cnbc.com/2017/12/20/bank-of ... ember.html

Rates have been under 1% for more than twenty years. Inflation is also very low.

Marketman
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Re: Are Japanese Stocks Cheap?

Post by Marketman » Mon Feb 05, 2018 10:34 am

Thanks everyone for the feedback. David, the article appeared in the print edition of the Wall Street Journal on Feb 2 on page B12.

It also had an interesting chart that showed where the forward P/E ratios for all major world areas lie in relation to their 15 year average. Everything was well above average average except Japan.

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Re: Are Japanese Stocks Cheap?

Post by asif408 » Mon Feb 05, 2018 11:32 am

OP,

I know forward P/E's are used a lot through the media and finance, but do you know how well forward P/Es actually predict returns vs. trailing P/E's, CAPE, etc? I personally would not have much faith in forward P/Es based on my knowledge of them. Forward P/Es are notoriously rosy, as they are based on "predicted" earnings. I would prefer anything trailing, that way at least whatever has happened has happened (even though corporations could lie) and is not based on some crystal ball prediction.

In fact, I think almost anything else you could use (CAPE, trailing P/E, P/B, P/S, P/CF) would work better. I personally prefer a combination of those I listed. If several of those indicate Japan is cheap, then I would say you have a reasonable stance.

juliewongferra
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Re: Are Japanese Stocks Cheap?

Post by juliewongferra » Mon Feb 05, 2018 1:32 pm

Marketman wrote:
Sun Feb 04, 2018 2:46 pm
Hello all I am new here, but not new to investing (especially at Vanguard). I thought I would direct your attention to an interesting article that appeared in the Wall Street Journal on February 2, 2018 entitled "Japanese Stocks are Looking Inexpensive." The article points out that nine of the 10 prominent stock markets around the world (including emerging markets) are above their average P/E's for the last 15 years (using forward earnings estimates). The lone outlier is Japan. The Topix average P/E has been about 15 and it is currently a tad less than 14 (even after a big run up last year). The article goes on to say that the author believes the economic prospects are good in Japan.

Any thoughts? I looked into Japanese index funds and they were surprisingly expensive. They all have expense ratios of around 50 basis points. Another fly in the ointment (at the expense of being called a market timer) might be that the dollar has weakened lately. (You buy less foreign assets with a weak dollar.) Any thoughts?

Cheap does not mean good value!!! And expensive does not mean bad value!!!

cheers,
jwf

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Re: Are Japanese Stocks Cheap?

Post by Hyoga » Mon Feb 05, 2018 6:59 pm

juliewongferra wrote:
Mon Feb 05, 2018 1:32 pm
Cheap does not mean good value!!! And expensive does not mean bad value!!!
What does it mean, then? 'Cause personnally I would think that is exactly the definition of cheap and expensive...
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BuyAndHoldOn
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Re: Are Japanese Stocks Cheap?

Post by BuyAndHoldOn » Mon Feb 05, 2018 7:38 pm

https://www.starcapital.de/en/research/ ... valuation/

According to CAPE, Japan is not cheap. I would rather this is *not* the case, as they are the biggest holding in the Total International fund(s) I invest in. Might be due to such low, even negative inflation (deflation)?

https://www.investopedia.com/terms/p/pe10ratio.asp

But they look cheaper on other metrics, including current PE. And I don't know how to use CAPE other than to "keep it in mind" when investing; maybe overweight lower CAPE countries, but not neglect the higher CAPE ones. Some countries are cheap on a CAPE basis always (like Russia); the United States is more expensive (above 24 on CAPE since 1996; Google it). Or at least the US has been above the "Historical Average" of 16 for the last 20+ years.

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Re: Are Japanese Stocks Cheap?

Post by juliewongferra » Tue Feb 06, 2018 11:06 am

Hyoga wrote:
Mon Feb 05, 2018 6:59 pm
juliewongferra wrote:
Mon Feb 05, 2018 1:32 pm
Cheap does not mean good value!!! And expensive does not mean bad value!!!
What does it mean, then? 'Cause personnally I would think that is exactly the definition of cheap and expensive...
Do you own a cheap suit or dress? It may fall apart after 1 or 2 washes. Maybe it cost only $10, but you will have to buy it again and again.
Do you own an expensive, well-made piece of clothing? It may last a lifetime! Maybe this is a one-time, $150 purchase.

Do you live in a cheap apartment? Maybe it is cheap because it is far from transportation and your commute is 1.5 hours, and you have to drive 30 minutes the other way to go to the grocery store. (and you have roaches and rodent infestations)
Do you live in an expensive apartment? Maybe it is expensive because it is close to work, good food, good nightlife, good culture, etc. (and you have no roaches and rodent infestations)

Heck, look at this Board's thread on Vanguard's site crashing. Some people are willing to go from cheap to expensive (well, *less* cheap) and be paying additional admin fees if Vanguard improved its site. Because sometimes you pay for value.

These are just examples of course. Sometimes cheap is good value and sometimes expensive is bad value. But we shouldn't treat cheap is synonymous with good value and expensive as synonymous with bad value.

cheers!
jwf

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Re: Are Japanese Stocks Cheap?

Post by Hyoga » Tue Mar 06, 2018 2:15 am

juliewongferra wrote:
Tue Feb 06, 2018 11:06 am
These are just examples of course. Sometimes cheap is good value and sometimes expensive is bad value. But we shouldn't treat cheap is synonymous with good value and expensive as synonymous with bad value.
If that's your point, then maybe we just have a vocabulary misunderstanding here. The word "cheap" probably has a nuance of "not good value" in it in English that I didn't fully grasp, I guess.
So, OK.
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Valuethinker
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Re: Are Japanese Stocks Cheap?

Post by Valuethinker » Tue Mar 06, 2018 4:22 am

Hyoga wrote:
Tue Mar 06, 2018 2:15 am
juliewongferra wrote:
Tue Feb 06, 2018 11:06 am
These are just examples of course. Sometimes cheap is good value and sometimes expensive is bad value. But we shouldn't treat cheap is synonymous with good value and expensive as synonymous with bad value.
If that's your point, then maybe we just have a vocabulary misunderstanding here. The word "cheap" probably has a nuance of "not good value" in it in English that I didn't fully grasp, I guess.
So, OK.
Ohh the traps of the English language. Just to help, when the British say something like "that's very interesting" they mean the opposite of what North Americans mean ;-).

No disrespect to you for getting confused-- we confuse ourselves ;-).

In products, "cheap" can often mean cheaply made (and thus bad value, even though a low sticker price). The English expression "cheap and cheerful" means that it wasn't much, but it wasn't expected to be "Premier Inn offers cheap and cheerful accommodation".

In a financial market sense, cheap is normally taken to be lowly valued on some criterion: price/ book; price/ sales; PE (Price/ Earnings Per Share) etc. The implication would be that a stock is cheap relative to its prospects and that an investor will earn superior returns by buying the stock and waiting for the market to realize it is underpriced.

That then leads to "it's cheap, but it's likely to stay that way". For example construction companies, which make low margins (EBIT/ Sales of 2-3% typically) and are quite cyclical with the economy. They are cheap but they usually don't outperform over the whole stock market cycle. Similarly in the run up to the Lehman bankruptcy in September 2008, many major financial stocks (Royal Bank of Scotland in the UK, FNMA and FMAC in the USA, AIG) looked cheap. They were classic "value traps"-- they were cheap because the market correctly anticipated that trouble was ahead (if not necessarily the near insolvencies that occurred).

I can tell you in 30 years of investing that cheap more often that not means the market has correctly valued the company's future prospects. IBM is a lot cheaper than Google, say, on most bases. But there's a good reason for that.

That cheapness has been true of Japan for decades. Once the bubble of valuation attained in the late 1980s was blown off, Japanese stocks moved to very low valuations. They have been at those valuations since at least the late 1990s, with little sign of moving.

The argument is that at some point Japanese company managements will embrace the North American doctrine of shareholder value above all, and use their spare resources of cash and borrowing power to restructure the companies, pay dividends, buy back shares. However whilst there have been fits and starts on this, involving often "Activist" funds from the west that buy shares and lobby for change, it's only been in fits and starts. Think Fanuc.

As with Mr. Abe and Mr. Kuroda's efforts to shake up Japanese economy, working practices and society generally, the extreme conservatism of Japanese society, and the emphasis on relationships (w suppliers, customers, employees etc.) has worked to slow down or prevent radical change.

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Re: Are Japanese Stocks Cheap?

Post by selters » Tue Mar 06, 2018 4:27 am

I think many investors are too hung up on Japan's peak in 1990. It spent 13 years to bottom out after the huge bubble in 1990. Since the bottom in 2003, the MSCI Japan index has returned 215% in USD. The MSCI Europe index has returned 278% in USD and the MSCI USA index has returned 339% in USD in the same time frame.

I don't know if Japan's stock market is cheap now.

Some stats
Dividend yield 1.88%
P/E ratio 16.32
P/E 12 month forward estimate 14.68
P/B value 1.47.

I don't know what its buyback yield is. Maybe they're spending earnings on investments in new projects. That may be a bullish sign.

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Re: Are Japanese Stocks Cheap?

Post by Hyoga » Tue Mar 06, 2018 6:33 am

They're spending earnings in deposit accounts actually... that's why you could still find a few companies trading lower than their cash net of debt not so long ago (you can only/still find a few trading below their current assets net of debt, now).
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Valuethinker
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Re: Are Japanese Stocks Cheap?

Post by Valuethinker » Tue Mar 06, 2018 8:47 am

Hyoga wrote:
Tue Mar 06, 2018 6:33 am
They're spending earnings in deposit accounts actually... that's why you could still find a few companies trading lower than their cash net of debt not so long ago (you can only/still find a few trading below their current assets net of debt, now).
If your first language is Japanese then your English is very good - you should be proud of yourself. If you've ever run Google translate into English on some Japanese text, it must be hilarious, the results. I've never tried roundtripping it - Japanese English Japanese English, but that must lead to some really odd formulations.

Hard to think of 2 languages (developed world, anyways) further apart than Japanese and English. And the American and Japanese mentalities are also very far apart which must make communication extremely difficult at times. I get the general impression that native Japanese speakers "switch" their brains into Anglo-Saxon mindset when they speak English-- we lack almost all the norms of politeness and "the unspoken assumptions" that Japanese has. (Germans have told me they become much less formal and stiff when speaking with *the same colleagues* in English rather than German. "Herr Doctor Schlieffer" becomes "Matt" when they switch to English, etc. ;-)).

I think the linguistic term is "high context language" (Japanese) vs. "low context" (English). English was basically the language evolved for the conquerors (Vikings and then French Normans) to speak to the conquered (the Anglo Saxons). In turn it was then applied to a global empire where slaves, Hindi, Irish speakers etc. could communicate with their new Anglo rulers. This led to a massive simplification of grammar and nuance (and a massive expansion of vocabulary: khaki, thug are just 2 (Indian) examples of words incorporated into the English language from colonial possessions).

English (British) mindset is more collective, and so in some ways is closer to Japanese. But that's like saying America is 10 on individualism, Britain is 8.5, and Japan is 1.0.

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Re: Are Japanese Stocks Cheap?

Post by Hyoga » Tue Mar 06, 2018 9:04 am

Well actually my first language is French. English comes second, and Japanese only third now that I forgot everything about Spanish and Italian. And you're right, it's quite far from the western languages and mindsets. You cannot speak it correctly if you don't embrace the social codes. I dare say I'm fluent in japanese, but very far from bilingual because of the many nuances you need to master before you can pretend to the bilingual title. Actually I don't know anyone who can, and I know a few gaijin who have stayed here for many years, studied at a Japanese university or even wrote their PhD thesis in Japanese. But in my view everyone struggles and sounds like a local ten year old (albeit with more vocabulary).
English is a much more neutral language, if I may say so.
That being said, you should invest in english schools in japan. :mrgreen: That business has still a long way to run. It's cheap though.
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Re: Are Japanese Stocks Cheap?

Post by Karamatsu » Tue Mar 06, 2018 8:36 pm

I think it's important to be aware that those cultural differences apply to investment as well. Rules of thumb (often just a mixture of superstition and data fitting) used for investing in the US (such as levels for cheap/dear metrics) don't necessarily apply in other markets, which sometimes have different goals, norms, and governmental interactions. So I think Valuethinker is correct (as usual!) in saying that the equity market here has whatever valuation it does because, on average, that's what it's worth.

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Re: Are Japanese Stocks Cheap?

Post by gips » Tue Mar 06, 2018 8:56 pm

IMO, it's really pretty simple: no one can identify a cheap country. Moreover, no one can identify a single cheap security from any country.

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Re: Are Japanese Stocks Cheap?

Post by aegis965 » Tue Mar 06, 2018 10:01 pm

Heard Dan Rasmussen talked about leveraged Japanese small value stocks in a podcast last week. He said these companies are cheap because of the risk of bankruptcy. Quant screens and value investors often avoid this kind of companies. But he argued that, in reality, the Japanese government has a tendency to step in and avert public company bankruptcy so bankruptcy risk is overestimated. With Japanese net-nets drying up, I wonder if this is a more fertile hunting ground.
I may be biased.

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